Although weaker than had been expected, emerging-market growth is exceeding growth in developed economies. According to the International Monetary Fund, the total GDP of emerging markets (measured on a purchasing power parity basis) is forecast to surpass that of the developed economies by 2014. Moreover, emerging market growth will account for more than 70% of growth in the overall world's output over the next few years. China and India will contribute as much as 40% of that growth. Over the next several years, many of the world's regions will register a significant growth in personal income and savings, which, given the higher rates of consumption growth in emerging markets, will bode well for corporate earnings. According to some estimates, there will be as many as 400 million more Chinese and about 300 million more Indians making more than $6,000 annually by the year 2020. All this makes the emerging markets investment story compelling.
Many investment advisors hold that the best way to play growth in emerging markets is to invest in established, developed-market companies that derive substantial shares of their revenues from emerging markets. Reputable consumer-sector oriented companies are likely to benefit the most from positive trends in emerging market growth. Among those companies, there are several dividend-paying stocks that represent attractive growth and income investments. We take a closer look at five such dividend payers that will fare well in the anticipated ascend of emerging markets. The figures about the companies' emerging market sales as percentages of total revenues are based on Bank of America Merrill Lunch estimates.
Philip Morris International (PM) derives as much as 61% of its revenues from Asia, Eastern Europe, Middle East & Africa. This $155-billion cigarettes maker-marketing popular brands such as Marlboro, Merit, Parliament, Virginia Slims, and L&M-is currently paying a dividend yield of 3.7% on a payout ratio of 68%. Its peers Altria Group (MO), Lorillard Inc. (LO), and British American Tobacco (BTI), are paying dividend yields of 5.4%, 5.5%, and 2.6%, respectively. The company's EPS expanded at an average rate of 10.8% per year since 2008, while its dividends increased cumulatively by as much as 85% since the June-quarter 2008. The company's growth will be driven in particular by the robust growth in emerging markets, where smoker populations are expanding. While China and India account for small shares in Philip Morris' sales, expansion in these markets could significantly boost growth. As regards its valuation, on a forward P/E basis, Philip Morris International's stock is trading slightly above its peer group and its four-year average ratio. RenTech's Jim Simons is bullish about the stock. So is fund manager Tom Russo (Gardner Russo & Gardner), who owns more than $710 million in this stock.
Colgate-Palmolive Corporation (CL) is another emerging-markets oriented company with some 52% of sales originating in emerging markets. This $51-billion consumer and household goods company pays a dividend yield of 2.3% on a payout ratio of 49%. Its main peers Procter & Gamble (PG), The Clorox Company (CLX), and Church & Dwight Co. Inc. (CHD) pay dividend yields of 3.3%, 3.5%, and 1.8%, respectively. Over the past half decade, Colgate-Palmolive expanded its EPS at an average rate of 15% per year, while its dividends grew at an average rate of 12% per year. Analysts forecast the company's EPS to grow at an average rate of 8.8% per year for the next five years. Colgate-Palmolive has much higher margins that its competitors and its return on invested capital [ROIC] dwarfs those of its competitors. The stock is particularly exposed to Latin American markets. On a forward P/E basis, the stock is trading on par with the personal products industry. However, it is priced higher than both P&G and The Clorox Company. The stock is popular with value investor Jean-Marie Eveillard and billionaire Jim Simons.
YUM! Brands (YUM) derives half of its sales in emerging markets. This $-billion chain of restaurants-with flagship restaurant brands of Taco Bell's, KFC, and Pizza Hut-is especially exposed to consumption trends in China. China, in which YUM Brands is the largest Western restaurant operator, accounted for as much as 50% of revenues in the company's latest quarter. According to the company "China (is) the best restaurant growth opportunity of the 21st century." Moreover, the opportunities for expansion in emerging markets are tremendous, given that the company has "about 58 Yum! restaurants per million people in the U.S. and only fewer than 2 restaurants per million people in the top 10 emerging markets." The company is paying a dividend yield of 1.9% on a 39% payout ratio. Its archrival McDonald's Corporation (MCD) is yielding 3.3%. Over the past five years, YUM! Brands' EPS and dividends grew at average annual rates of 13.4% and 17.8%, respectively. The company is expected to maintain the same robust pace of EPS growth for the next five years. As regards its valuation, on a forward P/E basis, the stock is trading on par with its respective industry. Among fund managers, Donald Chiboucis (Columbus Circle Investors-check out its top picks) and SAC Capital Advisor's Steven Cohen are big fans of the stock.
Kimberly-Clark Corporation (KMB) makes as much as 36% of its annual revenue in emerging markets. The company is a $34-billion producer of personal care, consumer tissue, healthcare and other household items. Over the past five years, the company's EPS and dividends expanded at average annual rates of 4.2% and 7.0%, respectively. The company's EPS growth is expected to nearly double to 8.2% per year for the next five years. KMB is a leader in a number of consumer product categories, including diapers, paper goods, and female personal care products. The company operates in a non-cyclical industry and generates ample liquidity, with free cash flow exceeding $0.5 billion each year in the past decade, despite pressures on margins due to rising input costs (such as fuel and pulp prices). KMB is paying a dividend yield of 3.4% on a payout ratio of 65%. Its peers P&G and Colgate-Palmolive pay dividend yields of 3.3% and 2.3%, respectively. In terms of valuation, on a forward P/E basis, the stock is priced below its respective peer group, including rivals such as P&G and the Clorox Company. Its price-to-book ratio is well above that of its industry on average. The stock is popular with Citadel's Ken Griffin and AQR Capital Management's Cliff Asness.
Procter & Gamble is also a major player in emerging markets, with emerging market revenues accounting for about 35% of total sales. The company is a $187-billion consumer goods giant. It pays a dividend yield of 3.3% on a payout ratio of 61%. Its peers Kimberly-Clark Corporation and The Clorox Company pay marginally higher dividend yields, while Colgate-Palmolive has a lower dividend yield. Over the past five years, P&G's EPS and dividends grew at average annual rates of about 2% and 10.5%, respectively. Analysts forecast that the company's EPS will expand at a much faster average rate of 8.5% per year for the next five years. The company has delivered sluggish growth, especially compared to its competitors. A few months back, hedge fund activist, Bill Ackman, acquired a $1.34-billion stake in the company with an intention to press or even oust the company's management in a drive to boost sales growth and streamline the company's business. As part of a new strategy, in emerging markets, the company will slow expansion into new countries and, instead, will focus on ten largest and most important markets, including Brazil, Russia, India, China, Turkey, Mexico, and Indonesia. As regards its valuation, on a forward P/E basis, the stock is priced on par with its respective industry. Legendary fund manager, Warren Buffett (see Berkshire Hathaway's top picks), and value investor Ken Fisher are bullish about the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.